Consultation: Developer Services Charging Arrangements & NAVs Bulk Supply Charges for 2021/22 - November 2020 - SES Water
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Consultation: Developer Services Charging Arrangements & NAVs Bulk Supply Charges for 2021/22 November 2020
SES Water Charging Consultation Page i Contents 1. Introduction ................................................................................................................. 1 1.1. Why is charging an important topic? ............................................................................ 1 1.2. Why are we consulting on our charges? ...................................................................... 1 1.3. What are the rules governing charging arrangements? ............................................... 2 1.4. Who is this document aimed at? .................................................................................. 2 1.5. What are we consulting on? ......................................................................................... 3 1.6. Have your say ............................................................................................................... 3 Part A – Charging Arrangements for New Connection Services........................................ 5 2. Calculating our charges............................................................................................. 5 2.1. Application charge ........................................................................................................ 5 2.2. Charging for traffic management as part of our charges .............................................. 6 2.3. Infrastructure charge .................................................................................................... 9 2.4. Income offset .............................................................................................................. 11 2.5. Other comments ......................................................................................................... 12 3. Presenting our charges ........................................................................................... 13 4. Our proposed transition arrangements ................................................................. 15 Part B – Bulk Supply Charges for NAVs ............................................................................. 16 5. Calculating avoided costs ....................................................................................... 16 6. Driving environmental improvements .................................................................... 19 7. Improving our Bulk Supply Charges document .................................................... 21 Appendix ................................................................................................................................ 22 Summary of consultation questions ........................................................................................ 22 Glossary................................................................................................................................... 25
SES Water Charging Consultation Page ii
Contact us
Our network services team can be contacted on:
Website seswater.co.uk
Email developerservices@seswater.co.uk
Phone 01737 772000
Monday to Friday: 8:30am to 5:00pm
Twitter @SESWater
Address SES Water
London Road
Redhill
RH1 1LJSES Water Charging arrangements Page 1
1. Introduction
Welcome to our consultation on the 2021/22 charges for New Connection Services and Bulk
Supply Charges for NAVs. This consultation provides more information on our charging
arrangements and the changes we envisage making. It is an opportunity for you to share your
views on what we are proposing as well as to provide feedback on how we can improve your
customer experience.
The rest of this Introduction explains the context to our consultation and the process that we
will follow. Part A of the consultation then covers charges for New Connection Services and
Part B of the consultation covers Bulk Supply Charges for NAVs.
1.1. Why is charging an important topic?
Over the course of 2019 and 2020, Ofwat has put more emphasis on the importance of
effective markets, with a particular focus on the Business Retail and Developer Services
markets. Effective markets can deliver a number of benefits for customers, society and the
environment. This can take the form of innovative approaches to products and services
offered, improved company performance, increased number of market players resulting in
customers having greater choice, improved quality of service and more competitive prices.
The charges that we make for new connections and for bulk supply to NAVs are an important
determinant of the ability of service providers to compete effectively in these markets.
1.2. Why are we consulting on our charges?
We are committed to engaging with our customers on an ongoing basis. We know that last
year our charging arrangements consultation exercise fell short: we did not communicate
clearly enough or allow enough time for you to provide us with the feedback we wanted.
As a result of the feedback we have received we are now more committed than ever to engage
with our customers and help promote effective markets. This consultation is a first step
towards achieving a more transparent and inclusive way of receiving your feedback and
capturing it in our work.
Our regulator, Ofwat, has also recently carried out a review of incumbent company support
for effective markets1. The findings of this review, including examples of best practice, give us
a further opportunity to improve our efforts in a way that goes beyond compliance. We would
welcome feedback on elements of this review that you consider particularly important for us
to take into account.
1
https://www.ofwat.gov.uk/regulated-companies/markets/review-of-incumbent-company-support-for-effective-markets/SES Water Charging arrangements Page 2
In March 2020 we published our first Bulk Supply Charges for NAVs. Although these charges
were developed based on Ofwat’s applicable guidance, we believe our approach can be
refined to incorporate elements of best practice as highlighted in Ofwat’s recent review.
We intend to follow up on this consultation with clear communication of our proposed charges
and periodic engagement with customers.
1.3. What are the rules governing charging arrangements?
We must follow two sets of rules in setting our charges:
• Ofwat’s ‘Charging Rules for New Connection Services (English Undertakers)’
• Charges Scheme Rules issued by the Water Services Regulation Authority under
sections 143(6A) and 143B of the Water Industry Act 1991
We must also follow IN 20/07 – Expectations, assurance and information requirements for
water company charges for 2021-22.
In order to comply with these rules, we must uphold the following principles in our charging
arrangements:
Fairness and Environmental
affordability protection
Transparency
Stability and
and customer-
predictability
focused service
Maintaining a balance between
developers and other customers
We are also required to carry out proportionate, timely and effective consultation with groups
likely to be significantly affected by any changes to our charges and charging arrangements.
1.4. Who is this document aimed at?
Our charging arrangements directly affect the following groups:
• Homeowners and Housebuilders;
• Developers;
• Self-Lay Providers (SLPs); and
• New Appointees (NAVs).
In accordance with the Charges Scheme Rules we invite views from the Consumer Council
for Water. We also welcome input and feedback from all interested stakeholders.SES Water Charging arrangements Page 3 1.5. What are we consulting on? Last year, we implemented changes to our Charging Arrangements in line with Ofwat’s Charging Rules for New Connection Services (English Undertakers) that came into effect on 1 April 2020. Whilst there are no changes to the Charging Rules requiring us to make significant methodological changes to the way we calculate our charges this year, we acknowledge that additional work is required to address the feedback we have received both from our customers and from Ofwat and to incorporate elements of ‘best practice’ in our work. The purpose of this consultation is to seek feedback that will help to shape updates to our Charging Arrangements for New Connection Services and Bulk Supply Charges for NAVs. Part A of the consultation concerns New Connection Services. We invite feedback on: • How our charges are calculated (Section 2); • How our charges are presented (Section 3); and • Our proposed transitional arrangements (Section 4). Part B of the consultation concerns Bulk Supply Charges for NAVs. We invite feedback on: • Calculating avoided costs (Section 5); • Driving environmental improvements (Section 6); and • Improving our Bulk Supply Charges document (Section 7). The feedback received on this consultation will help us inform the way we present and calculate our charges for 2021/22. We are in the process of calculating our charges for 2021/22 and currently we do not anticipate large variations in our charges for typical developments compared to 2020/21. However, if the charges are materially different compared to last year, we will engage with customers before the publication of our final charges on 31 January 2021. As part of Ofwat’s information requirement, we will also publish a statement of significant changes for new connections and developments stating whether bills for typical developments have increased by more than 10% and what handling strategies we have developed to manage the impact (if any) alongside publishing our final 2021/22 charges. 1.6. Have your say You are kindly invited to provide feedback on the questions set out throughout this document and by using the online survey (link to follow) by 17:00 on Friday 4 December 2020. You can also send your response directly to us at developerservices@seswater.co.uk.. Please feel free to respond to as many or as few questions as appropriate. We will publish our final charges for new connections services and bulk supply charges by 31 January 2021 and they will come into effect from 1 April 2021. This consultation is part of a wider programme of engagement and communication with stakeholders. In Spring 2021, we will publish another consultation covering a wider set of topics on how we can work with you more effectively.
SES Water Charging arrangements Page 4 Figure 1.1: Our engagement programme Privacy notice Your response to this consultation will help us shape our Charging Arrangements for New Connections Services and Bulk Supply Charges for NAVs and understand stakeholder views and preferences. Your response will be securely stored for up to one year and only used in the context of this consultation, after which it will be securely disposed of. By participating in this consultation, you agree to us using your response in our results. We will not publish names of individuals or organisations but may refer to the type of stakeholder. For more information about our privacy policy please visit: https://seswater.co.uk/about- us/policies/privacy-notice.
SES Water Charging arrangements Page 5
Part A – Charging Arrangements
for New Connection Services
2. Calculating our charges
Our 2020/21 Charging Arrangements are organised by categories of charges. The main ones
are:
• Application charge; • Connections charges;
• Infrastructure charge; • New water mains;
• Income offset; • Additional charges;
For our 2021/22 Charging Arrangements, we propose to expand on the description of our
charges and how they are set to increase transparency and clarity of our Charging
Arrangements. Additionally, we propose to make targeted changes to the application charge
and how we charge for traffic management and would like your feedback on our approach to
setting the infrastructure charge and the income offset. We discuss these items in turn below.
2.1. Application charge
Our existing approach
An application fee is charged to a Developer for the cost of processing an application for new
connection services. This includes recording the application into our system, getting in touch
with the Developer to clarify any application details required in the early stages of the process
as well as processing the application in our accounting system and designing the requested
Development. Our Charging Arrangements also refer to the possibility of offering a discounted
fee if a customer employs its own designer.
Additionally, as part of our Application charge section, we set out the charges for re-quote
fees and phased connection works.
Our proposed approach for 2021/22
To increase transparency and support effective markets, we propose to make the following
changes:
Table 2.1: Proposed changes to application charge
Proposed change Expected benefits of our proposed approach
1. Rename our section to ‘Ancillary • To reflect that it captures more than the application
charges’. charge.SES Water Charging arrangements Page 6
Proposed change Expected benefits of our proposed approach
2. Provide a clear description of each • Providing additional context on our charges and under
charge and in what context it what circumstances they apply and what each charge
applies. covers will make our charges more transparent and
predictable for our customers.
3. Split out the mains design element • The design of a Development is a contestable element
from the application fee. and either SESW or an alternative provider (SLP) can
undertake this for a Developer.
• Splitting out the design element from the application fee
– a non-contestable element – will allow an equally
efficient SLP to compete for the Development.
4. Include a charge for reviewing a • The review of a design is a non-contestable element
design. given SESW will ultimately adopt the assets built by an
SLP.
• An SLP should be able to know upfront the charge for
SESW to review its design – this will encourage
competition in the market.
Questions
1. Do you agree with the proposed changes to the application charge, as described in
Table 2.1?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.
2.2. Charging for traffic management as part of our charges
Our existing approach
To provide you with New Connection Services, we usually need to work in a footpath, road or
carriageway. Consequently, traffic management is required for us to undertake the work safely
and efficiently with as minimal disruption as possible to roads users.
All traffic management outside of the development site is subject to planning and co-ordination
with the local highways authority in accordance with the New Roads and Streetworks Act
1991, as amended by the Traffic Management Act 2004.
We operate within eight local highway authorities and each authority has its own set of traffic
management charges. As such, our existing approach consists of the following:
• Our Charging Arrangements refer to our Charging Arrangements Calculator to get an
estimate of traffic management charges depending on the parameters and
requirements of a customer’s Development.SES Water Charging arrangements Page 7
• Once the customer lodges its application into our system, we calculate the exact traffic
management charges based on the detailed information supplied by the customer
based on its Development.
Our existing Charging Arrangements also provide a breakdown of indicative traffic
management charges and note that works may be subject to additional highway authority
charges and that they can be subject to change at any time. We have replicated the table from
our Charging Arrangements below.
Table 2.2: SESW traffic management charges 2020/21 (Figure 8.2d in Charging
Arrangements)
Traffic management charges 2020/21 charges (£)
Full road closure 2,500.00
Bus stop suspension 250.00
Traffic light suspension 483.50
Pedestrian crossing suspension 373.83
Parking bay suspension 70.00
Permit charge (varies on region/road) per request for access 65.00
Three way traffic lights (per week) 502.34
Four way traffic lights (per week) 561.41
Charge for manual operation (per day) 218.59
Set out ¾ way lights 247.01
We acknowledge that our existing approach has some advantages and disadvantages.
On the one hand, our existing approach is cost-reflective: as part of providing a detailed quote
to our customer, we calculate the traffic management charges we anticipate to incur to
complete the works. We note that we do not make any upward/downward adjustments to
reflect actual costs incurred by us ex-post.
On the other hand, our existing approach does not necessarily allow for customers to work
out their traffic management charges as they would not necessarily know what would be
needed for their Development without requesting a quote. This makes our charges less
predictable.
Other incumbent water companies use different approaches to charge for traffic management
and that there is no concerted approach across the industry. For instance, some companies
apply an uplift on their charges to recover the overall cost that they would incur – this approach
is in accordance with the principles of stability and predictability but could be perceived as
lacking transparency and cost-reflectivity. Other incumbent companies have fixed charges
upfront – this approach is in accordance with the principle of transparency but could be
perceived as lacking predictability as the customer would not necessarily know what traffic
management measures their Development could require. Finally, we are aware that at least
one incumbent is considering charging for traffic management at cost upon receipt ofSES Water Charging arrangements Page 8
information from local highway authorities – this approach shares some similarities with our
existing approach.
Our proposed approach for 2021/22
As part of our review of the structure of our charges, we are considering merging some of our
charges where it would be difficult for the customer to know what charges would be required.
Traffic management measures fall in that category.
We are considering uplifting our service connections, mains requisitions or diversion charges
to include some of the costs associated with traffic management. The table below describes
the traffic management charges that would be charged separately and those that would be
included in our service charges as an uplift.
Table 2.3: SESW traffic management charges 2021/22 – proposed changes
Traffic management charges Proposed change
Full road closure Separate charge
Bus stop suspension Uplift on charges
Traffic light suspension Uplift on charges
Pedestrian crossing suspension Uplift on charges
Parking bay suspension Uplift on charges
Permit charge (varies on region/road) per request for access Uplift on charges
Three way traffic lights (per week) Separate charge
Four way traffic lights (per week) Separate charge
Charge for manual operation (per day) Uplift on charges
Set out ¾ way lights Separate charge
Lane rental Separate charge
Expected benefits of our proposed approach for 2021/22:
• Stable and predictable service connection, mains requisitions and diversion charges
that include the costs associated with traffic management requirements.
• Customers can confidently work out how much a Development may cost.
Questions
2. Do you agree with the proposed changes to traffic management charges, as described
in Table 2.3?
▪ Strongly agree
▪ Agree
▪ DisagreeSES Water Charging arrangements Page 9
▪ Strongly Disagree
Please elaborate on your response.
2.3. Infrastructure charge
Our existing approach
An infrastructure charge is payable when a property is connected to the water network for the
first time. The charge is a contribution to the additional cost of providing the infrastructure of
pipes, pumping stations and treatment works necessary for the provision of water services as
a consequence of new developments.
Our infrastructure charge is calculated by:
• (a) Taking the average of the spend on water network reinforcement associated with
new water mains or connections over a five-year rolling period.
• (b) Taking the average of the estimated number of new connections over a five-year
rolling period.
• Dividing (a) the average spend on water network reinforcement by (b) the number of
expected new connections.
Each year we reflect on and review our actual outturn cost of investment and infrastructure
income to make any adjustments to our forecast expenditure and infrastructure charge
calculation. This ensures that current and future expenditure on to the network to cover the
demand for new development and growth is reflected fairly and transparently to all customers.
We apply a single level of infrastructure charge across our supply area, i.e. a flat rate, as we
plan our water supplies as a single water resource zone and have the ability to supply much
of the area from more than one treatment works. Our 2020/21 infrastructure charge is
presented in the table below.
2020/21 infrastructure charge Charge per property connected
Water £369
We also offer a discount on the infrastructure charge for properties built to a higher standard
of water efficiency than required by building regulations. Our current discounts are:
• A 15% reduction on the fixed price listed above if all bathroom fittings are ‘A’-rated
based on the water label OR rainwater harvesting or greywater recycling is fitted.
This equates to a water usage of around 105 litres/person/day.
• A 30% reduction if all bathroom fittings are ‘A’-rated based on the water label AND
either rainwater harvesting or greywater recycling is fitted. This equates to a water
usage of around 80 litres/person/day.
We also offer reduced charges for redeveloped sites where a Developer can provide evidence
that a Development has been using the water network within the last five years. For instance,
if a new Development of 20 properties is built on a site that previously had five properties andSES Water Charging arrangements Page 10
were connected to the network in the last five years, the infrastructure charge will be reduced
to apply to 15 properties.
A customer has two payment options for infrastructure charges:
• A customer can pay for the infrastructure charge upfront, at the same time as paying
for the rest of the quote.
• A customer can pay for the infrastructure charge in arrears, upon completion of the
works.
In either case, the customer pays for the infrastructure charge as quoted, regardless of when
the works are completed and whether the infrastructure charge has changed.
Our proposed approach for 2021/22
Although we have considered zonal charging for the infrastructure charge, at this time we do
not have evidence it would be appropriate for our community, though this is an issue that we
will continue to review periodically. This is because:
• SES covers a small geographical area and the network reinforcement requirements
are similar across all areas meaning the differences would be minimal; and
• we have the ability to supply much of the supply area from more than one treatment
works.
For the 2021/22 Charging Year, we:
• propose to maintain our existing approach with a single level of infrastructure charge
across our supply area;
• propose to maintain our existing discounts for water efficient properties;
• propose to maintain our approach to applying reduced charges for redeveloped sites;
and
• do not propose to make any changes to the payment options for infrastructure charges
in 2021. However, we are considering making changes for 2022/2023 Charging Year:
A customer would still have two payment options for infrastructure charges:
• A customer could pay for the infrastructure charge upfront, at the same time as paying
for the rest of the quote; this would be at the infrastructure charge prevailing at the time
of payment.
• A customer could decide to pay for the infrastructure charge in arrears, upon
completion of the works but it would be charged at the infrastructure charge prevailing
at the time of payment as opposed to the infrastructure charge prevailing at the time
the initial quote was provided.SES Water Charging arrangements Page 11
Questions
3. We are proposing to maintain a flat rate for infrastructure charges rather than zonal.
To what extent do you agree or disagree with this proposal?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.
4. We are proposing to continue offering the same discount for water efficient properties
and reduced charges for redeveloped sites. To what extent do you agree or disagree
with this proposal? Do you have a suggestion of other ways of promoting water
efficiency?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.
5. For 2022/23, i.e. in two years’ time, we propose to maintain the option to pay for the
infrastructure charge in advance or upon connection but are considering applying the
infrastructure charge prevailing at the time of payment.
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.
2.4. Income offset
Our existing approach
SESW subsidises the cost of new connections/water mains based on the amount of new
revenue it expects to receive from the new properties connected over the next twelve years.
This contribution made by us to developers or SLPs is called the ‘income offset’, and it is
deducted from the infrastructure charge. The contribution is shared across all new connections
in the form of a discount, regardless of the type of development, i.e. we apply a flat income
offset.
We use the Discounted Aggregate Deficit (DAD) approach to calculate the income offset which
recovers costs partially from new customers and partially from existing bill payers. We modelSES Water Charging arrangements Page 12
the potential development mains work for a Charging Year and run the total cost of mains and
services through the DAD calculator to establish the monies to be recovered upfront from the
new customers and the monies to be recovered from existing bill payers over a period of
twelve years (including the cost of borrowing).
Our proposed approach for 2021/22
At this stage, we are not minded to make any changes to the way we calculate the income
offset but are looking at further options and are open to stakeholder suggestions.
Questions
6. We currently calculate the income offset using the DAD approach. Do you agree with
this approach? If not, please provide alternative suggestions for the calculation of the
income offset.
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.
2.5. Other comments
7. Do you agree with our areas of focus? Do you have further suggestions you wish to
make that are not captured by any of the preceding questions?SES Water Charging arrangements Page 13
3. Presenting our charges
Our existing approach
We have received some constructive feedback in the past year on ways to improve how we
present our Charging Arrangements. We understand that some of our customers find it
challenging to work out how much their Development would cost due to:
• the way we present our charges;
• how we refer the customer to our Charging Arrangements Calculator tool for guidance
on how our charges are set instead of providing a clear description with the Charging
Arrangements themselves;
• the technical language we use throughout the document making our charges less
accessible to all; and
• the limited number of clear worked examples provided in our Charging Arrangements.
Our proposed approach for 2021/22
For the 2021/22 Charging Year, we are committed to making significant changes to the way
we present our charges to:
• provide a more customer-focused service;
• increase predictability and transparency of our charges; and
• improve customer experience when using the document.
To achieve this, we have thought of different ways we can improve the usability, look and feel
of our Charging Arrangements for 2021/22 and have taken on board feedback received. In
addition to complying with Ofwat’s IN 20/07 specific information requirements (including
worked examples), we propose to make the following changes:
Table 3.1: Proposed changes to the presentation of our charges
Proposed change Rationale for change and expected benefits of our
proposed approach
• Present all of our charges exclusive • For clarity and consistency with other incumbent water
of VAT. companies.
• Remove decimal places and round • For simplicity.
to the nearest £5.
• Present all of our charges in tabular • We currently use a mix of tabular and text/paragraph to
form. present our charges. The consistent use of tables
throughout the document should make it easier for
customers to find the charges relevant to their
Development.
• To ensure all of our charges can be found in a single
document
• Clearly label the charges that are • Complies with Rule 15 of the Charging Rules.
contestable and non-contestable.SES Water Charging arrangements Page 14
Proposed change Rationale for change and expected benefits of our
proposed approach
• Allows customers to understand what elements of their
Development can only be completed by SESW versus
an SLP.
• Introduce a section in the document • Allows SLPs to quickly identify what charges are
for self-lay charges. relevant to them instead of having to read the entire
document.
• Provide a breakdown of the • Providing the underlying calculations in the worked
underlying calculations in the examples will increase transparency and clarity.
worked examples.
• Simplify the language we use to • Increase consistency across the industry and facilitate
describe our charges and make use understanding of charges for developers working in
of Ofwat’s glossary of terms. multiple regions and dealing with multiple incumbents.
• Explain what our charges are and in • Providing additional context on our charges and under
what context they apply and when what circumstances they apply and what each charge
special circumstances exist. covers will make our charges more transparent and
predictable for our customers.
• Understanding where special circumstances exist and
therefore fixed charges do not apply.
Questions
8. Do you agree with the proposed changes to the presentation of our charges as
described in Table 3.1?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please explain your score.
9. Would you find any specific additional worked examples to be helpful? Please
elaborate on your response.
10. What other suggestions do you have for improving the presentation / layout of the
Charging Arrangements?SES Water Charging arrangements Page 15
4. Our proposed transition arrangements
Our new Charging Arrangements will be published on 31 January 2021 and will come into
effect on 1 April 2021.
All applications received before 1 April 2021 will be subject to our 2020/21 Charging
Arrangements. However, after 1 April 2021, if a customer has not accepted and paid for a
previous quote2 and feel they would be better off under the new Charging Arrangements they
can request a requote (subject to a requote fee). Once the new quote is produced based on
the 2021/22 Charging Arrangements, the customer has the choice to accept and proceed
under the initial quote or the new quote.
All quotes issued after 1 April 2021 will be subject to our 2021/22 Charging Arrangements.
Questions
11. To what extent do you agree or disagree with our transition arrangements proposal?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.
2
Quotes are valid for three months from the date they are issuedSES Water Charging arrangements Page 16 Part B – Bulk Supply Charges for NAVs 5. Calculating avoided costs Our existing approach We calculate our bulk charges using the “wholesale minus” approach as introduced in Ofwat’s 2018 guidance. This approach takes our average wholesale charges as a starting point and deducts onsite costs that we would avoid (referred to as avoided costs) if a NAV were to provide the “last mile” service. The residual is our bulk supply charges. We calculate our avoided costs using a “middle-down” approach where we combine company- level data from the annual performance reports with more granular information on categories of operating costs to derive unit costs for the last-mile infrastructure. We use historical data on operating costs across different categories to estimate the share of total treated water distribution operating expenditure that can be avoided if NAVs were to provide “last mile” service. We then apply this share to forecast treated water distribution operating expenditure as reported in Ofwat’s Annual Performance Report (APR) to estimate avoided costs in 2020/21. To obtain an “avoided cost per connection” figure (i.e. £/connection) we divide avoided costs by the length of mains and multiply the resulting £/meter figure by the meters of mains per housing developing connections. 2020/21 charges Charge per connection Avoided costs per connection £20.08 Under this approach, on-site avoided costs relate to direct operating expenditure (i.e. operational costs that can be associated to a specific on-site activity) and capture an element of indirect costs (i.e. general and support costs) due to the starting point being the APR costs. Our proposed approach for 2021/22 Ofwat’s 2018 guidance does not prescribe a way of deducting the ongoing costs of operating and maintaining on-site assets from the relevant wholesale tariffs. The CEPA 2020 report on NAV Bulk Supply Charges (commissioned by Ofwat) considered there is no single preferred approach for calculating avoided costs. Bottom-up approaches – which use specific estimates of typical costs incurred for different activities identified as avoided – can be more cost-reflective but can also be less transparent than more top-down or middle-down approaches – which use company-level data for different activities identified as avoided and allocating them to the on-site network. In its recent consultation on NAV Bulk Supply Charges, Ofwat discussed the trade-offs between the different approaches in relation to the charging principles of consistency, transparency, simplicity, and cost-reflectivity and concluded that it is minded to prefer bottom-
SES Water Charging arrangements Page 17
up approaches when estimating avoided costs but said that an alternative approach would be
to apply middle-down approaches given they would be more transparent than top-down
approaches as would provide more granular cost segmentation than solely relying on the
annual performance reports .
Based on the above, we are proposing to retain the use of a middle-down approach and to
enhance the transparency with regards to how we calculate our avoided costs for 2020/21 by
explaining our approach in more detail.
Both the CEPA report and the Ofwat consultation discussed the potential inclusion of
additional categories of avoided costs which should not be limited to direct operating
expenditure only. For instance, where a NAV operates the last mile infrastructure, it is
expected that the incumbent could incur lower capital maintenance expenditure and/or avoid
certain additional indirect (e.g. overhead) costs. We are therefore considering whether to
widen our definition of avoided costs by capturing those additional cost categories.
Due to the recent change in the income offset rule, the depreciation and returns on assets
element of the wholesale minus approach are no longer applicable. The CEPA report puts
forward a number of different options for providing a suitable rate of return for NAVs to
compensate for this change. We are therefore considering the option of a margin approach,
akin to the approach taken in the water retail market.
The table below presents a breakdown of the avoided costs captured in our current approach
and our new proposed approach.
Table 5.1: SESW avoided costs: current and proposed approach
Avoided costs captured in our current Potential avoided costs to be captured in
approach for 2020/21 Bulk Supply charges our proposed approach for 2021/22 Bulk
Supply charges
• Direct & indirect operating costs • Direct operating costs
• Leakage • Indirect operating costs
• Leakage
• Indirect costs
• Capital maintenance costs
• Margin (to replace the rate of return element)
Expected benefits of our proposed approach for 2021/22:
• Higher cost reflectivity through a bottom-up approach;
• More cost-reflective bulk supply charges through expansion of set of avoided on site
costs;
• Alignment of our approach with Ofwat’s preferred minded to position;SES Water Charging arrangements Page 18
Questions
12. To what extent do you agree or disagree with our proposal to retain the use of a middle-
down approach and to enhance the transparency with regards to how we calculate
avoided costs by explaining our approach in more detail?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.
13. To what extent do you agree or disagree with our proposal to expand the set of avoided
costs captured in our approach?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.
14. To what extent do you agree or disagree with our proposal to introduce a margin
approach to compensate for the change in the income offset rule?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.SES Water Charging arrangements Page 19 6. Driving environmental improvements The Ofwat 2018 guidance did not explicitly address the question of environmental improvements/impacts on bulk charges for NAVs. In its latest (2020) consultation, Ofwat asked stakeholders whether it should be more prescriptive on the role water companies should have to foster environmental improvements. One way we can contribute to environmental improvements is through the way we capture leakage allowances in our bulk charges. Our existing approach Bulk supply charges are reduced to account for leakage between the boundary of the NAV site to the premises on site. As such, if we assume that leakage is set at an appropriate level, charges will be lower as a result of reducing metered volumes to account for the right level of leakage. However, if the leakage allowance is set too high, a NAV may benefit from lower charges despite a high level of leakage. The magnitude of this risks depends on the degree of control that NAVs have on leakage levels. Our current approach on leakage relies on the average actual level of leakage from the current NAV Water Resource Management Plans. By relying on NAVs own leakage level, we ensure highest reflectivity of our charge to the condition of a newly developed site. Our proposed approach for 2021/22 For 2021/22 we are considering some variations in the way we capture leakage in our bulk supply charges. We are considering the use of a wider set of benchmarks for leakage levels of comparable sites. For example, actual level of leakage from i) the current NAV Water Resource Management Plans, ii) our own sites of similar size; and iii) average expected leakage of a hypothetical new development of similar size based on technical studies. We would then pick the minimum leakage level from our benchmark. We believe this approach is more likely to capture an “efficient” level of leakage thus only lowering the bulk supply charges by an “efficient” amount. This in turn, would incentivise a NAV to reduce its leakage levels. In this way, we will reach a balance between cost reflectivity and efficiency, whilst minimising environmental impacts. Expected benefits of our proposed approach for 2021/22: • Incentivises lower leakage levels; • Improved balance between cost-reflectivity and efficiency.
SES Water Charging arrangements Page 20
Questions
15. To what extent do you agree or disagree with our proposal to use a wider benchmark
for leakage?
▪ Strongly agree
▪ Agree
▪ Disagree
▪ Strongly Disagree
Please elaborate on your response.SES Water Charging arrangements Page 21
7. Improving our Bulk Supply Charges document
We are committed to taking your feedback on board to improve the look and feel of our bulk
supply charges document.
16. We therefore invite you to provide feedback on how we can improve our document. In
your response you may wish to consider the following:
▪ What are your views on the existing bulk supply charges document?
▪ Would additional worked examples be useful to capture the complexity of different NAV
sites, e.g. example for a non-standard NAV?
▪ What other suggestions do you have for improving the bulk supply charges?SES Water Charging arrangements Page 22
Appendix
Summary of consultation questions
1. Do you agree with the proposed changes to the application charge, as described in
Table 2.1?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
2. Do you agree with the proposed changes to traffic management charges, as described
in Table 2.3?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
3. We are proposing to maintain a flat rate for infrastructure charges rather than zonal.
To what extent do you agree or disagree with this proposal?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
4. We are proposing to continue offering the same discount for water efficient properties
and reduced charges for redeveloped sites. To what extent do you agree or disagree
with this proposal? Do you have a suggestion of other ways of promoting water
efficiency?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
5. For 2022/23, i.e. in two years’ time, we propose to maintain the option to pay for the
infrastructure charge in advance or upon connection but are considering applying the
infrastructure charge prevailing at the time of payment.
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.SES Water Charging arrangements Page 23
6. We currently calculate the income offset using the DAD approach. Do you agree with
this approach? If not, please provide alternative suggestions for the calculation of the
income offset.
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
7. Do you agree with our areas of focus? Do you have further suggestions you wish to
make that are not captured by any of the preceding questions?
8. Do you agree with the proposed changes to the presentation of our charges as
described in Table 3.1?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please explain your score.
9. Would you find any specific additional worked examples to be helpful? Please
elaborate on your response.
10. What other suggestions do you have for improving the presentation / layout of the
Charging Arrangements?
11. To what extent do you agree or disagree with our transition arrangements proposal?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
12. To what extent do you agree or disagree with our proposal to retain the use of a middle-
down approach and to enhance the transparency with regards to how we calculate
avoided costs by explaining our approach in more detail?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
13. To what extent do you agree or disagree with our proposal to expand the set of avoided
costs captured in our approach?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.SES Water Charging arrangements Page 24
14. To what extent do you agree or disagree with our proposal to introduce a margin
approach to compensate for the change in the income offset rule?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
15. To what extent do you agree or disagree with our proposal to use a wider benchmark
for leakage?
▪ Strongly agree ▪ Disagree
▪ Agree ▪ Strongly Disagree
Please elaborate on your response.
16. We therefore invite you to provide feedback on how we can improve our document. In
your response you may wish to consider the following:
▪ What are your views on the existing bulk supply charges document?
▪ Would additional worked examples be useful to capture the complexity of different NAV
sites, e.g. example for a non-standard NAV?
▪ What other suggestions do you have for improving the bulk supply charges?SES Water Charging arrangements Page 25
Glossary
Term Description
Act The Water Industry Act 1991 as amended from time to time.
Asset payment The amount described in section 51CD (3) of the Water Industry Act
1991 in relation to a section 51A agreement with a Water
Undertaker. This is a payment made to a developer who has
selected a Self-Lay Provider to lay its mains and connections to
properties. It is the water company’s contribution to the mains
construction costs.
Carriageway Tarmac covered ground
Charges Scheme Rules The Charges Scheme Rules issued by the Water Services
Regulation Authority under sections 143(6A) and 143B of the Water
Industry Act 1991.
Charging Arrangements This document which outlines the approach to charging for new
connection services, including income offsets and the methodologies
for calculating those, applied by us in accordance with the Charging
Rules.
Charging Rules Charging Rules for New Connection Services (English Undertakers)
issued under sections 51CD, 105ZF and 144ZA of the Act.
Charging Year A calendar year running from 1 April in a given year to 31 March in
the following year.
Connection charge A charge for the physical connection to the water main.
Contestable work Work or services that can be completed by either the relevant
undertaker or persons other than the relevant undertaker.
DAD The discounted aggregate deficit approach used to calculate the
Income Offset.
Developer Any person or business which is responsible for a Development.
Development Premises on which there are buildings, or on which there will be
buildings when proposals made by any person for the erection of
any buildings are carried out, and which require connection with,
and/or modification of, existing water or sewerage infrastructure.
Diversions The alteration or removal of a public water main or sewer in
accordance with section 185 of the Act only.
Diversion charge A charge for moving an existing water main.
Domestic premises Any premises used wholly or partly as a dwelling or intended for
such use.
Domestic purposes As defined in The Water Industry Act 1991.SES Water Charging arrangements Page 26
Term Description
Existing main Main that was in operation before development commenced.
Fixed Charges Charges set for a given Charging Year which are fixed in amount or
which are calculated by reference to a predetermined methodology
set out in the undertaker’s Charging Arrangements, the application
of which allows calculation at the outset of the total amount owing in
that Charging Year in respect of the charges in question. Such
charges are to be fixed for a Charging Year, as defined above.
Footpath (Footway) A concrete covered surface
House Any building or part of a building that is occupied as a private
dwelling house or which, if unoccupied, is likely to be so occupied
and, accordingly, includes a flat.
Income offset A discounted sum of money offset against the infrastructure charges
that would otherwise be applied in recognition of revenue likely to be
received by the Water Undertaker in future years for the provision of
supplies of water to premises connected to the new water main.
Infrastructure Charge The charges described in section 146(2) of the Water Industry Act
1991. That is, a charge paid by the developer to the water company
when a property is connected to the company’s water supply for the
first time which contributes to wider network reinforcement to meet
the increased demand arising from the new connections.
NAV New appointment and variations provide water and/or sewerage
services to customers in an area previously served by the incumbent
monopoly provider. A new appointment is made when Ofwat
appoints a company for the first time to provide services for specific
geographic area. A variation is where an existing appointment is
varied to extend the areas served.
Network reinforcement Refers to work other than Site Specific Work, as defined below, to
provide or modify such other:
i. Water Mains and such tanks, service reservoirs and pumping
stations, or
ii. Sewers and such pumping stations
as is necessary in consequence of the Site Specific installation or
connection of Water Mains, Service Pipes, Public Sewers and
Lateral Drains.
New appointee Company holding an appointment as a relevant undertaker where
the conditions of that appointment limit the charges that can be fixed
under a charges scheme by reference to the charges fixed by one or
more other relevant undertakers.
New Connection Services The collective term for New Water Mains, New Sewers, Service
Connections, Lateral Drains, Waste Connections and Diversions.SES Water Charging arrangements Page 27
Term Description
New Water Mains A water main provided by us in accordance with our duties under
section 41(1) of the Act.
No excavation These charges apply where we do not undertake any excavation,
backfilling or reinstatement, for example, where the trench has been
pre-excavated by you to our standards.
Non-Contestable Work Work or services that only the relevant undertaker (or an agent
acting on their behalf) can do or provide..
Non-domestic purposes For a service connection or new water main:
a. the premises being connected to the water network do not consist
in the whole or any part of a building; or
b. the supply is for purposes other than domestic purposes.
On-site Works carried out or proposed to be carried out within the site
boundary.
Off-site Works carried out or proposed to be carried out outside the site
boundary.
Point of connection The nearest practical location where the existing water main or
sewer is the same size or larger than the new connecting main or
sewer.
Requisition Charge Charges that will be imposed by that undertaker for work carried out
by it in accordance with the duties imposed by section 41(1)
(provision of requisitioned Water Main) and section 98(1) (provision
of requisitioned public sewer) of the Water Industry Act 1991. That
is, a charge set by the water company for the provision of the new
water main or public sewer (a requisition) to recover the costs
reasonably incurred in providing them.
Self-Lay The laying of water pipes and associated infrastructure in
accordance with section 51a of the Act.
Self-lay provider (SLP) An accredited operative who can lay the pipework for a new water
main or sewer rather the infrastructure being laid by the water
company. The water company will take over responsibility for self-
laid pipes that meet the terms of its agreement.
Service Connection The construction of the pipe between the supply pipe of the
premises and the public water main which is provided under section
45 and 46 of the Act.
Service Pipe So much of a pipe which is, or is to be, connected with a water main
for supplying water from that main to any premises as — (a) is or is
to be subject to water pressure from that main; or (b) would be so
subject but for the closing of some valve, and includes part of any
service pipe.SES Water Charging arrangements Page 28
Term Description
Site Specific Work on, or the provision of, water or sewerage structures or
facilities located on a development as well as work to provide and
connect a requested water main, sewer, communication pipe or
lateral drain on, to or in the immediate vicinity of, the development.
Charges for site specific work relate to the provision of connection
structures or facilities located on a development up to the nearest
practical point on the existing network where the connecting
pipework is of a nominal bore internal diameter no larger than that of
our existing network. They do not refer to costs or work required as
part of network reinforcement.
Undertaker A water undertaker or sewerage undertaker.
Unmade ground (verge) Refers to ground which does not have a surface. For example,
unmade ground may feature grass and topsoil.
Water main Any pipe, not being a pipe for the time being vested in a person
other than the Water Undertaker, which is used or to be used by a
Water Undertaker or licensed water supplier for the purpose of
making a general supply of water available to customers or potential
customers of the Water Undertaker or water supply licensee, as
distinct from for the purpose of providing a supply to particular
customers. This definition includes tunnels or conduits which serve
as a pipe and any accessories for the pipe.
Water Undertaker A company appointed under the Water Industry Act 1991 to provide
water services to a defined geographic area and which owns the
supply system and other infrastructure.You can also read
